The London-to-New York Currency Trade

For all the headlines and hand-wringing since 2009 about the viability of the euro, its exchange rate versus the dollar has barely changed in five years.

While we admit the observation may seem superficial (the euro rose to $1.51 in 2009 and fell to $1.19 in 2010), we make mention in order to highlight the distinction between holding euros over time versus trading euros short-term across time zones, where the Citigroup currency team has identified an uncanny trading pattern.

To understand the opportunity, first recognize how dealers trade currencies. There are three "spot" markets for trading euros over the course of a 24-hour day. New York constitutes the primary market from 8am to 5pm ET, followed by Tokyo 5pm to 1am ET and then London 1am ET until New York resumes the following day at 8am.

Citigroup Head of G10 FX Strategy Richard Cochinos analyzed the intra-session price action of the euro for the three spot markets and found a very clear pattern since 2009. Whereas London tended to trade lower, New York tended to trade higher. Asia was roughly flat. Over time, this pattern created some significant distortions.

Reliable patterns are hard to come by, and this one strikes us as particularly valuable. As Mr. Cochinos wrote to clients: "Day trading behavior is tending to skew prices in a meaningful manner. Supporting evidence for this type of quick reversal has also shown up in our cash order flow."

As for those of us wondering how to profit, he elaborates:

International money flows are complex. This relationship is not: Buy euro dips early in the London session, sell them in New York late afternoon.

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Ventured&Gained offers posts and features about the real issues and opportunities facing individual investors. Analyses or commentary are the views of the author and/or commentator, and do not necessarily reflect the views of Bloomberg News.